“It’s a pretty complex business and management have a fair amount on their plate. Reducing the complexity would be a good thing."

Nigel Lake, of advisory firm ­Pottinger, said such a deal would be extremely logical for both Wesfarmers and Zurich.

“Both those insurance businesses are sub-scale in Australia. The ­businesses owned by Wesfarmers are decently profitable and have grown well over time but they are not the ­natural owners in the long term. And Zurich’s business has been sub-scale for some time and this is pretty much the only business that they can buy that will give them scale."

Top-of-the-insurance cycle coup

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The deal would merge the ­fifth-largest and sixth-largest insurers and give Zurich an estimated 10 per cent of the market, similar to the share held by the fourth-largest player, ­Allianz, but well behind
Insurance ­Australia Group
,
Suncorp
and
QBE
. Macquarie Capital and Gresham ­Advisory Partners are working with Wesfarmers, while Zurich has appointed Goldman Sachs.

Analysts agreed a multiple of 15 times forward earnings – which would lead to a sale price of just under $3 billion – was possible, although this would represent a top-of-the-insurance cycle coup for Wesfarmers managing director
Richard Goyder
.

“Most of the pure personal [insurance] lines transactions in general insurance have been done at forward multiples of 15 times," Mr Lake said. “But these transactions have taken place at different points in the cycle."

Wesfarmers shares climbed 69¢ on Thursday to close at a six-month high of $42.97.

Best margins in seven years

Five years ago, when the financial crisis and bad weather were buffeting the profits of insurance companies, there was speculation Wesfarmers would make a play for IAG or the insurance operations of Suncorp.

But better trading conditions mean both insurance giants are enjoying their best margins in seven years, along with record profits. Rises in their share prices mean a tilt from Wesfarmers is impossible and the opposite transaction – Wesfarmers getting out of ­insurance – makes more sense.

In a speech on Tuesday, Mr Goyder repeated his mantra that every ­Wesfarmers business, which includes Coles supermarkets and coal assets, is up for sale at the right price.

“People always ask me if businesses are for sale in Wesfarmers; the answer is ‘sure, they are for sale’. If the price that we would receive from a buyer on an after-tax basis is greater than our view of the net present value of the business, then it’s clearly in our shareholders’ interest that we dispose of the business," he said.

One industry expert noted that Wesfarmers did not replace Rob Scott with a seasoned insurance executive when he left the insurance division he had run for five years at the start of 2013 to become Coles finance director, potentially signalling less appetite to grow the business through acquisitions.

If a deal eventuates, Zurich is expected to continue to wholesale insurance products to Coles, although the arrangement could be complicated.

“When all this is happening in the same corporation, you can get alignment of interest and everyone can make that work," one analyst said. “With external underwriting, you get margin-sharing complications. Fortunately, Coles Insurance is quite well-established already."